What is a Cannabis Excise Duty Surety Bond
Updated: Jul 8
The Cannabis excise duty regime implemented under Bill C-74 requires that all participants licensed to cultivate, process and/or package cannabis products register with the CRA and apply for a cannabis license under the Excise Act, 2001.
Generally speaking, the Act prescribes that licensees must:
Comply with the Regulations regarding excise licenses and registrations
Post security to the CRA of an amount between $5,000 and $5,000,000
File monthly returns and pay applicable federal excise duties owed to the CRA under form B300
Why does the CRA require cannabis producers to post financial security?
The Canada Revenue Agency requires licensees to post security as a backstop mechanism to ensure they will be able to recover any and all outstanding excise duties owed from the producer.
In other words, if the licensee were to go insolvent – the CRA could draw upon the posted security for the amount of outstanding duties owed.
How does the CRA determine the amount of security that is required to be posted?
For first time applicants, the CRA requires financial security to be posted in accordance with the estimated first 12-month calendar year sales. The below calculation is often used to determine this amount:
[(estimated number of grams of dried cannabis to be sold over the first 12 months x $1 per gram) + (estimated number of milligrams of total THC to be sold over the first 12 months x $0.01)] ÷ 12 months
For renewal applicants, the required amount of security is determined based on the highest single month of calculated duties payable over the past calendar year.
What options are available to satisfy the CRA’s Excise Duty Security Requirements?
The Canadian Revenue Agency will accept a few different forms of financial security under the cannabis excise duty framework. Most notably, that is in the form of cash, a letter of credit or a L302 excise duty surety bond.
What is a L302 Cannabis Excise Duty Surety Bond?
An excise duty surety bond is a financial instrument that functions very similar to a Letter of Credit. However rather than being issued by a bank, a surety bond is underwritten and issued on behalf of an insurance company in exchange for an upfront annual premium.
Should a situation arise where the licensee is unable to meet their financial obligations, the CRA would then be able to make a call on the bond – requesting the amount of outstanding excise duties payable directly from the surety company.
What does a Surety Company consider when underwriting a L302 Excise Duty Surety Bond?
A surety company will look at a few key components in order to determine whether or not they are willing to offer a cannabis excise duty bond. Their primary objective is to determine the company’s actual and projected financial strength, with an emphasis on the likelihood that the company will be able to meet their financial obligations over the period of the bond. This primarily involves an evaluation of the commonly referred to three “C’s”; character, credit and capacity. In particular, the surety will consider:
Cash on hand and balance sheet liquidity
Cash burn rate and likelihood of financial insolvency
The company’s experience, reputation and management team bios
The company’s positioning in the marketplace and relative ranking against peers
Historical and projected revenues, expenses and liabilities
What is required in order to receive an excise duty bond?
Building off the above, there are a number of documents the surety company will request in order to determine one’s eligibility for a bond. At a minimum, they will often require the following:
Audited prior year financial statements
Financial statement(s) from the most recent quarter(s)
A bank reference letter
General questionnaire supported by management team bios or resumes
Personal financial statements of the main shareholders
How much does an excise duty bond cost?
Once the bond company is satisfied that the applicant is in good financial health, they will charge a rate based on the perceived quality of the operation. This includes factors such as the relative financial strength of the company, operational performance against market peers and the terms of the bond requested. In today’s marketplace, this rate typically ranges from 0.75% up to around 1.5% of the bond amount, per annum.
For example, if a licensed cannabis producer was required to post an excise duty bond of $500,000 with a quoted bond rate of 1% - the annual bond premium would be as follows:
= $500,000* 1%
Ready to Get Started?
Our team has demonstrated expertise helping both new and established cannabis companies procure excise surety bonds at preferred market rates. Cannabis producers are required to register through the federal excise duty and excise stamp regime with onerous requirements to report and remit both calculated and additional cannabis duties. Our team can lighten this burden while guiding you through the process of obtaining a L302 cannabis tax bond.
Give us a call to learn how we may be able to assist you in obtaining a bond.